Unemployment and Severance Pay: Watch Out

Workers who receive severance pay are generally disqualified from receiving unemployment benefits for the period over which the severance accrues. This is true whether the severance is paid in a lump sum or in the payment method by which regular salary or wages were paid.

However, this is not the trap.

The trap is that severance is itself not subject to unemployment taxes; employers don’t pay premiums to the UI Division for severance. Severance is subject to income taxes and FICA, but not to UI taxes.

Why does this matter?

A worker who receives severance may fail, particularly if the severance period is lengthy and if the worker is in a higher-income field where jobs pay well but are scarce, to earn 10 times her weekly benefit amount in UI-taxable wages during the applicable benefits year as required by statute. In practice, someone on severance can earn out her severance, become eliglble for unemployment and then be disqualified.  Further, if the worker contacts the UI Division for unemployment benefits during severance, it may work as a Catch-22: the worker has established a benefits year during which no benefits are payable (due to severance), then may be “gotcha-ed” out of a more favorable benefits year due to the lack of earnings.

The problem is that UI Division publications encourage workers to apply for benefits immediately upon becoming unemployed, whether they are getting severance or not. For some workers, that advice is counter-productive, or at least deserves closer review and additional advice from legal counsel. Someone receiving severance is “unemployed”, but just disqualified under most circumstances. There is no provision to “fix” a poorly-chosen benefit year; it must start from the first claim/application for UI benefits.

Bottom line: if you or your client may be getting severance, don’t apply for UI benefits without first undertaking careful, detailed analysis of what the eligibility requirements are for that worker not in theory, but in practice.

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